Monday, February 25, 2008

Muse fund

Abhay Rao

Sebi issues a notice to all art funds asking them to register with them, the stock market fluctuations cause a nation-wide panic and safe investments are the new mantra of the day. This being the backdrop of the present economic scenario, art as an investment emerges into the limelight.

Art funds, a relatively new concept in the Indian market, is fast catching on; from the current six odd funds, there are about half a dozen being added in the near future. Even ICICI Bank is contemplating a $25 million fund.

With Sebi’s message to investors, art funds have come under the scanner, yet very little is really known about them. But the media only mentions Osian, Crayon Capital, Copal Art, Yatra, Edelweiss Securities and a few other art funds, along with what an art fund basically is. However, there are many other aspects to art funds. Understanding them in detail will give you a clearer picture of how this widely unexplored world works and how you can benefit from it.

Back to the basics

Basically, it’s a fund created to collect money from investors, which is then used to purchase and sell art by the fund manager. The profits arising from these transactions are then distributed back to the investors, and hence it works a lot like any other mutual fund.

Now, one must wonder if it’s just like a mutual fund and one can invest in the equity market himself, why not in art too. Besides the expertise required, art also has a lot of incidental expenses, purchase and sales expenses, and liquidity problems, which are all major hurdles for an individual investor. If one were to collect art purely for aesthetics then he/she may not be concerned about its liquidity. However, if one invests in art for financial benefits then art funds provide a far better option. Statistically, an individual art owner will have to make a profit of more than 60% before he earns his first rupee from that investment, and hence the popularity of art funds among art enthusiasts and HNI’s continue to grow.

Figuring out figures

The Indian art market has boomed over the past couple of years, and art being such a subjective matter is hard to index and predict. However, while art funds like the Yatra Art fund are hesitant to disclose figures like return on investment to the public, Sanjay, a director at the Sakshi Art Gallery that manages the fund did say that the figures are shared with only those who have invested in the fund. Industry experts expect returns to be around 30-40% in one year and over a three-year period the numbers double.

On the other hand, Ajay Seth, the chief mentor of Copal Art Pvt Ltd, tells us that the minimum appraisal on paintings have been a 100% and have gone up to as much as a 1,000% as well. He also clears the air about Copal Arts, which he says, “Is not an art fund or collective investment scheme (CIS) but an art portfolio or art bank”. These are new services available for investors who might want to invest directly.

Currently, while India has 1% share of the global art market, there are tremendous growth possibilities. The global art market is currently pegged at approximately $60 billion and is increasing at a fast pace. The Indian market too has been increasing at the rate of 25%, which, though slower than the global art market, has been a big improvement from where it was.

Most art funds in the country are in the range of Rs 20 to 100 crore, though these figures are just the beginning, feel most people within the industry. Copal Arts also plans to launch Rs150-crore scheme next month, followed by a whopping Rs 1,000-crore one later in the year. The Indian art market is currently estimated to be $350 million and is expected to touch the $1 billion mark in the next few years. While these figures may lead one to believe that the Indian art market is going to plateau soon, the growing Russian and Chinese art Markets are pegged to be at 1.5 and $1.2 billion, while the global art market is growing at more then 25% annually. Most art funds, however, seem to be expecting returns of 30-40% annually, and thus in a period of 3 to 5 years expect 150 to 200% return on investment. Keeping this in mind, art funds do seem very lucrative investments. Financial advisors and banks also advise you to invest about 5-10% of your investments in art, as it provides a good and safe diversification option.

Keeping track

Once you choose to put in your hard-earned money in an art fund, keeping track of your investment is the next step. All the major art funds in the country provide either quarterly or half-yearly reports to their investors, which detail information on the funds finances. They also contain the fund’s net asset value (NAV) and earnings to date. The NSE portal also tracks the NAV of these funds. Art funds are completely transparent as far as their operations are concerned and are willing to share all information with their clients.

Pitfalls to watch out for

Art funds, currently, have a very small client base and are not comfortable dealing with the market in general. This is because most art funds target only the sophisticated investor who has some knowledge of what he is getting into. They also have minimum investment requirements-usually of Rs. 10 lakh for a lock in period of 3 years. This being the scenario, art funds mention the risks involved in their prospectuses. Since expertise is the key in art investment, the knowledge that your fund managers have is crucial. Liquidity is always a concern with this asset class, and knowing where best to buy and sell is essential. The art world is very diverse in itself, requiring a lot of research and experience; so always choose a fund managed by those you know to be experts. Also, the type of artists the fund buys and supports will tell a lot about the risk-taking nature of the company.

If a company usually deals in masters, future masters and gallery-established artists, they are a low risk-taking company and probably a good place for you to start. On the other hand, if a company deals more with upcoming artists and gallery-accepted artists they have a higher risk element. Also, this being an asset completely dependent on people, bad performing artists or deteriorating artists could change the nature of your investment, especially as the demand for the artist may fall. However, such cases are rare in established artists and hence the risk is only minimal.

Why an art fund?

The art world is thousands of years old and spans across many eras, each with its own unique art collection, style and value. The art market also is far deeper than most anticipate and it connects people from all over the world. Art Markets are essentially of two kinds: primary and the secondary art market. The primary art market is more widely known and is usually a fixed price market or an auction-based market. While this market is easily accessible to all and far easier to read, the art houses, galleries and merchants that are a part of this market usually charge a high percentage of commission on all transactions. This makes it harder for an individual to gain financially as he loses a major chunk of his earnings in commission itself.

Art funds have an edge over individuals here; they have far better personal relations with these art houses and hence get better rates than otherwise available. They also often do bulk transactions that get them better rates.

Apart from the primary market, most art experts and fund managers will be networked within this world and have a lot of secondary market information and sources. The secondary market essentially has different prices for art at different places and to be aware of this vast, parallel market one needs experience and research, both of which are supposed to be the fund manager’s forte. This also helps them bargain effectively with art houses and merchants of the primary art market hence getting the best prices available.

Art funds also avail of sales tax savings due to VAT being adjusted on trading. They are neither liable to pay capital gains tax as they pay 33% tax on profit per annum, and hence overall, they have a far lower cost of acquisition than an individual investor would. All these aid art funds to trade in art far more efficiently, making art funds a good way to invest in art.

Enter Sebi

Earlier this month the Securities and Exchange Board of India (Sebi) issued a message to all investors regarding art funds. Currently, there is not a single art fund registered with them, and under the new directive, all art funds come under the definition of a collective investment scheme (CIS) as per section 11AA (2) of the Sebi Act, 1992 and hence must register themselves. Failing to do so would lead to both criminal and civil charges against these funds as per the Sebi Act and regulations.

While most tended to view this as a move by Sebi to clamp down on the rising art funds that are at present under no government control, industry experts paint a different picture altogether.

All art funds have said that they are very open to such a move and are in fact happy by Sebi’s interest in them. While their business will not be affected by this move, the general outlook is one of mutual cooperation at the moment, as the funds do realise that ratification by the government and the placement of regulations will only further the credibility of these funds.

All big art funds have been in discussions with Sebi for a while now and are hoping to come out with a structure that will be beneficial to both parties. As no formal guidelines and regulations have been released yet, one can only wait and watch as to what the final outcome of the talks amount to. The art funds have declared that they will welcome all the rules and regulations that Sebi comes out with and have no qualms about this new arrangement.
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